The incremental information content of receivables in predicting earnings of large manufacturing firms in Kenya
Accounts receivables being a component of the working capital of a firm requires proper and effective management to ensure smooth running and survival of firms. The study explores how well information on receivables can be used to predict earnings of large manufacturing firms in Kenya. It hypothesizes that firms should better predict their earnings if they manage well the information on receivables. The objective of the study was to examine the incremental information content of receivables in predicting earnings of large manufacturing firms in Kenya. Both qualitative and quantitative methods were used to fulfil the main purpose of the study. A regression model was used to carry out the empirical analysis. In the model, Earnings were computed using profit before tax, while the receivables by the total amounts owing to the firm by the debtors. The study used secondary data that was collected from the company's published annual reports as filed in the Capital Markets Authority library and company's journals for a period of10 years. The findings and analysis reveal that information contained in receivables have an effect on the earnings of large manufacturing firms in Kenya. The study used a simple linear regression model to establish the association between receivables and earnings. The model equated earnings as a function of receivables. The results obtained from the regression model show that there is an inverse relationship between information content of receivables and earnings of large manufacturing firms in Kenya. Large manufacturing firms in Kenya should therefore prudently manage the information contained in receivables to be able to better predict their earnings for planning purposes. In view of these findings, the researcher recommends that large manufacturing firms should have stringent credit policies laid down and proper customer screening done to evaluate the customer's credit worthiness. This will go a long way in maximizing the earnings to the firm and by extension the shareholders wealth.